1

Choice of Foreign Market Entry Mode Cognitions from Empirical and

Theoretical Studies

Xuemin Zhao and Reinhold Decker Dr. Reinhold Decker is Professor of Marketing at the Department of Economics and Business Administration of the University of Bielefeld P. O. Box 10 01 31 D-33501 Bielefeld Germany Phone: +49-(0)521-106-6913 / 3936 Fax: +49-(0)521-106-6456 E-Mail: rdecker@wiwi.uni-bielefeld.de Xuemin Zhao is Ph.D. student of the Graduate School for Economics and Management at the University of Bielefeld (BiGSEM) P.O. Box 10 01 31 D-33501 Bielefeld Germany Phone: +49-(0)521-106-4863 Email: xzhao@wiwi.uni-bielefeld.de

Acknowledgement: We would like thank our colleagues Prof. Dr. Herbert Dawid and Prof. Dr. Stefan Wielenberg, Department of Economics and Business Admini-stration at the University of Bielefeld, for interesting discussions and comments with regard to the topic of this paper.

2

Choice of Foreign Market Entry Mode Cognitions from Empirical and

Theoretical Studies

Abstract This paper analyzes critically five basic theories on market entry mode decision with respect

to existing strengths and weaknesses and the results of corresponding empirical studies.

Starting from conflictions both in theories and empirical studies dealing with the entry mode

choice problem we motivate a significant need of further research in this important area of

international marketing. Furthermore we provide implications for managers in practice and

outline emerging trends in market entry mode theory as well as possible starting points for

future research.

Keywords: Market entry mode choice; Existing theories and empirical studies;

Conflictions; Implications and future challenges.

1. Choice of market entry mode – a critical issue in

international marketing

The interest in market entry mode choice originates from the theory of international invest-

ment. It was studied as a problem with distinctive feature, extent, form and pattern of interna-

tional production (Southard 1931; Hymer 1960; Caves 1971 and 1974; Dunning 1958 and

1977). Then it was discussed as a critical issue in international marketing by many econo-

mists and marketing experts. Wind and Perlmutter (1977) argued that the choice of market

entry mode has great impact on international operations and can be regarded as “a frontier

issue” in international marketing. Root (1994) claimed that the choice of market entry mode

is one of the most critical strategic decisions for MultiNational Enterprises (MNEs). It affects

future decisions and performance in foreign markets, and it entails a concomitant level of re-

source commitment which is difficult to transfer from one to another, especially from high

level to low level. Kumar and Subramaniam (1997), Chung and Enderwick (2001), as well as

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Nakos and Brouthers (2002) emphasized that the choice of market entry mode is a critical

strategic decision for firms intending to conduct business overseas.

Being such an important issue market entry mode choice became the object of numerous

theories and models developed to understand and explain associated phenomena. Among

these five basic approaches are particularly prominent and have been applied widely. They

are

1. the Stage of Development (SD) model (Johanson and Paul 1975; Brooke 1986),

2. the Transaction Cost Analysis (TCA) model and extensions (Anderson and Gatignon,

1986; Hill et al. 1990; Erramilli and Rao 1993),

3. the Ownership, Location and Internalization (OLI) model (Dunning 1977, 1980, 1988,

1995, 1998, and 2000),

4. the Organization Capacity (OC) model (Aulakh and Kotabe 1997; Madhok 1998),

and

5. the Decision Making Process (DMP) model (Root 1994; Young et al. 1989).

To our knowledge no prominent models or rather theories have been developed in recent

years, but various empirical studies have been carried out to test the validity of the existent

ones, to find factors that might have an impact on the choice of market entry mode and to

measure corresponding effects.

In the ‘90s Hill et al. (1990) integrated environmental and strategic factors into the TCA

framework. Klein et al. (1990) extended TCA by integrating production costs and dividing

external uncertainty. Erramilli and Rao (1993) modified the TCA framework to adapt it to the

service industry. Coviello and Munro (1997) argued that the network relationship developed

affects firm’s internationalization and the choice of entry mode. Tse et al. (1997) have ana-

lyzed the influence of country specific, industry specific, and operation related factors on en-

try mode choice. Reuber and Fisher (1997) pointed out that the international experience of a

management team is positively related with the development of strategic partners and foreign

sales. Pan et al. (1999) examined the impact of order and mode of entry on firm performance

in foreign markets. Finally, Brouthers et al. (1999) supported Dunning’s OLI framework by

empirically examining German and Dutch firms that had invested in Central East European

countries (CEE).

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In the current decade most of the relevant research is focused on examining the impact of

specific factors on the entry mode decision. Among these factors institution attracted greatest

attention. Some papers extended the TCA theory by adding institutional factors into the given

framework (Brouthers 2002; Lu 2002). Others argued that institution affects the entry mode

decision by increasing the cost of uncertainty and transaction (Said and McDonald 2002;

Meyer 2000). Further factors which have been examined empirically are:

technology transfer (Mattoo 2001),

immigrant effect (Chung and Enderwick 2001),

market size (Nakos and Brothers 2002; Eicher and Kang 2002; Chung and Enderwick

2001),

firm size (Leung et al. 2003; Nakos and Brouthers 2002; Evans 2002),

CEO successor characteristics (Herrman and Datta 2002),

cultural distance (Leung et al. 2003; Chen and Hu 2002; Gillespie 2002; Evans 2002;

Cristina and Esteban 2002),

industry barriers and firm advantages (Chen and Hennart 2002; Siripaisalpipat and

Hosbino 2000),

international experience (Reuber and Fisher 2003; Evans 2002; King and Tucci 2002),

country risk and environmental uncertainty (Cristina and Esteban 2002),

role of staffing (Konopaske et al. 2002), as well as

foreign exchange rate and host country currency (Baek and Kwok 2002).

All these factors can be classified into country specific factors (cultural distance, institution,

exchange rate, etc.), industry specific factors (market size, market structure, industry type,

etc.), firm specific factors (firm capacity, firm size, etc.) and product specific factors (product

type, maturity, sales service, etc.).

As to be demonstrated in the following section it is easy to see that there is no great congru-

ence regarding which of the available models is most applicable to entry mode choice deci-

sion. As to be expected each model has its specific limitations.

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The remainder of the paper is organized as follows. In section 2 we give an overview of ex-

isting theories and models on market entry mode choice and discuss their strengths and

weaknesses. Conflicting results of existing theories and empirical studies are discussed in

section 3. The theoretical and empirical cognitions drawn from this review are then used as

the basis for practical implications for marketing management and some general suggestions

for future research in section 4.

2. Description and critical discussion of established theories

2.1 The SD model

The stage of development (SD) model, which is also known as U model, was proposed by

Johanson and Paul (1975) while studying internationalization strategies of Small and Me-

dium sized Enterprises (SMEs). The model asserts that the internationalization of SME is a

long, slow, and incremental process with two dimensions: the geographical or rather cultural

expansion and the commitment. The original approach was enhanced and applied by Brooke

(1986) to explain market entry mode decisions. The author concluded that the entry mode is

dependent on the stage of a firm’s development. But also the enhanced model still has some

shortcomings: it provides a set of feasible entry modes but not the right ones (Young et al.

1989). Due to the fact that it is not capable of explaining why a newly established firm starts

entry with wholly owned venture but not export, the SD model does not dominate in existent

literature.

2.2 The TCA model and its extensions

Transaction cost analysis (TCA) was proposed by Anderson and Gatignon (1986). The under-

lying theory is based on transaction cost economics initiated by Williamson (1975 and 1985)

as a tool to explain economic problems where asset specificity plays a key role. Under the

hypothesis that organizational structure and design are determined by minimizing transaction

costs, they concluded that MNEs choose a specific mode of market entry which maximizes

the long term risk-adjusted efficiency. The choice depends on four constructs that determine

the optimal degree of control: transaction specific asset, external uncertainty, internal uncer-

tainty, and free riding potential. Entry modes are assessed by the level of control. Wholly

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owned ventures, for example, are characterized by the highest level of control. In the relevant

paper special measures for each of the four constructs have been developed. Additionally,

some testable propositions are addressed.

The framework was then widely extended and examined by other researchers. Anderson and

Weitz (1986) constructed a framework using transaction cost theory to analyze vertical inte-

gration and marketing productivity problems. Hill et al. (1990) integrated both environmental

and strategic factors into the TCA framework. Klein et al. (1990) extended the TCA by inte-

grating production costs and by dividing external uncertainty. Erramilli and Rao (1993)

modified the framework of the TCA to suit for service industries by assuming that firms pre-

fer high level of control unless proven otherwise. Lu (2002) put forward institutional theory

as complementary to TCA theory by claiming that the latter is static and unable to explain the

evolution of entry mode. Brouthers (2002) extended the TCA to institutional, cultural and

transaction cost theory. He claimed that institutional factors refer to the conditions that un-

dermine property rights and increase risks in exchange and that cultural factors tend to influ-

ence managerial costs and uncertainty evaluation in the target market. Through empirical ex-

amination he concluded that firms which make their entry mode choice with this criterion are

performing better than those which do not. Other researchers empirically examined the TCA

on different samples and found great support. Meyer (2000), through examining the invest-

ment behavior of German and British MNEs in CEE, concluded that unstable incomplete in-

stitutions increase the transaction costs and thus influence the entry mode decision in transit-

ing economies such as CEE. Nakos et al. (2002) analyzed both the market entry decisions

and the performance of Dutch and Greek SMEs in CEE and concluded that the transaction

cost relationship identified in previous MNEs studies tend to apply to SMEs as well. Chen

and Hu (2002) supported the framework of TCA by examining foreign-invested firms in

China from 1979 to 1992. Leung et al. (2003) utilized survival analysis to examine the TCA

related factors effecting entry mode decisions of foreign banks for China.

Despite of offering many insights into the role of corporate governance in entry mode deci-

sion, the TCA model and its extensions have some clear weaknesses. Transaction costs them-

selves are ambiguous and difficult to measure. Thus they can only offer very limited implica-

tions for the managers in practice, and, what’s more important, transaction cost economy it-

self has no connection with corporate governance. The TCA framework has only limited ex-

7

planation ability with respect to complex multinomial choices of market entry mode (Klein et

al. 1990; Gatignon and Anderson 1988) and it is imperfect due to the fact that it

neglects government regulations, which generally define the feasible set of entry

modes, and production costs (Anderson and Gatignon 1986),

fails to address the larger strategic and competitive context within which the firms are

operating (Madhok 1998),

assumes that the only objective of entry mode choice decisions of a MNEs is profit

maximization, which is not always true1 (Milgrom and Roberts 1992), and

excludes non-transaction benefits (Anderson and Gatignon 1986).

Even though meanwhile extensions of the basic framework are including some of the ignored

factors, they are still based on transaction costs which are difficult to measure prior to the

relevant transactions.

2.3 The OLI model

The ownership, location and internalization (OLI) theory was introduced by Dunning (1977)

at a presentation on a Nobel Symposium in Stockholm on “The International Allocation of

Economic Activity” intending to identify and evaluate the factors influencing both the initial

act and the growth of foreign production. In the following decades the model was developed

by the author himself (Dunning 1980, 1988, 1995, 1998, and 2000).

In his first presentation Dunning recognized that attempts to identify distinctive features of

foreign direct investment in terms of ownership endowments were done by Southard (1931)

and Dunning (1958). This idea was explored by Hymer (1960) in his PhD thesis and was re-

fined and extended by Caves (1971 and 1974). Many hypotheses focusing on particular kinds

of ownership advantages of MNEs were put forward, for example, production differentiation

(Caves 1971) as well as entrepreneur and managerial capacity (McManus 1972). He also ac-

1 Some MNEs might enter into a new market for strategic networking for instance. Or, if a MNE is owned by

several shareholders, and if some of them are meanwhile upstream or downstream partners of the considered

MNE, those might influence the MNE to adopt an entry mode which does not maximize the profit of the MNE

but their own one.

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knowledged that Vernon (1974) focused on location advantage of the host country to explain

differential foreign investment. The concept of ownership advantage was integrated by Dun-

ning (1977) to explain international production. Furthermore, Buckley and Casson (1976)

proposed internalization to explain international investment and argued that MNEs would

internalize its activities in a foreign country if the costs of internalization were lower than the

costs of exporting or other contractual agreement.

The OLI theory stated that entry mode decisions are determined by the composition of three

sets of advantages as perceived by enterprises:

a) ownership advantages (i.e. advantages that are specific to the nature and the national-

ity of the owner),

b) internalization advantages (i.e. advantages arising from transferring ownership advan-

tages across national boundaries within own the organization), and

c) location advantages (arising from the fact that different locations feature different re-

sources, institutions and regulations affecting the revenue and the cost of production).

The more OLI advantages a firm possesses the greater the propensity of adopting an entry

mode with a high control level such as wholly owned venture. The aforesaid was updated by

Dunning (1995, 1998, and 2000) who argued that competitive advantages, market failure and

collaboration, as well as dynamic environments should also be integrated into the model

when decisions on international production are made.

The OLI model was widely applied in the past to explain entry mode decisions and its basic

ideas were supported by several empirical studies. Nakos and Brouthers (2002) as well as

Brouthers et al. (1999) adopted this framework to explain MNEs’ entry mode decision when

facing a transition economy such as CEE. Agarwal and Ramaswami (1992) supported this

theory by empirically examining a sample of American service firms. But in spite of its

eclecticism, its improved measurability, and its great explaining power the OLI model is

solely a static one. It intends to explore all important factors impacting entry mode decisions

but in fact fails to do so due to the neglect of strategic factors, characteristics of and situ-

ational contingency surrounding the decision maker, and competition.

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2.4 The OC model

The organization capacity (OC) model was developed by Aulakh and Kotabe (1997) and

Madhok (1998) and it is based on organization theory. It regards a firm as a bundle of capa-

bilities and knowledge where individual skills, organization and technology are inextricably

woven together (Nelson and Winter 1982). The model argues that entry mode decision, the

firm’s boundary issue, is a capability related one, and it is made under a calculus governed by

considerations related to the deployment and development of a firm’s capabilities. For the

first time firm or rather organization capacity is taken into account for entry mode choice de-

cision making. However this model has some limitations. The traditional assumption that the

capacity of an individual firm is limited to ownership is invalid when a firm’s efficiency re-

lated decisions are significantly influenced by collaborative agreements which might change

its capacity strongly. Adopting that a strategy is not only dependent on the organization ca-

pacity but also on the organization efficiency, measures of organization efficiency have to be

developed. This model also neglects the impact of the decision maker as well as of sociologi-

cal and political factors.

2.5 The DMP model

The decision making process (DMP) model was proposed by Root (1994) and developed by

Young et al. (1989), Kumar and Subramaniam (1997), Pan and Tse (2000), as well as Eicher

and Kang (2002). It argues that entry mode choice should be treated as a multistage decision

making process. In the course of decision making diverse factors, such as the objectives of

the intended market entry, the existing environment, as well as the associated risks and costs,

have to be taken into account. Focusing on optimizing the process of decision making but not

on exploring which factors might affect and what their impact on entry mode choice is this

model might be more practical. However it is still not perfect because it ignores the role of

the organization itself and that one of the decision maker within the decision making process.

2.6 Summing up

To conclude this section we have summarized the main aspects of the above discussion in

table 1.

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Table 1 about here.

3. Some conflicting results

As could been seen from the discussion above most of the existent studies aim to explore the

factors which are related to market entry mode choice and their impacts. In fact there are a lot

of factors that have to be taken into account in relevant research and practice. Root (1994)

altogether identified 22 factors influencing market entry mode decision, but one has to sup-

pose that there are still more.

One of the main problems regarding the market entry mode decision is the fact that it is ill-

defined, complex and dynamic (Kumar and Subramaniam 1997; Young et al. 1989). It is a

function of various factors and their interactions. And of course not all factors have equal im-

portance. Moreover, the same factors may play a different role in different contexts. People

studying the problem with different expectations may arrive at different conclusions. Differ-

ent samples selected, different time period analyzed, different methodologies used, or even

different skills of the analysts may also induce conflicting results, especially in empirical

studies. In the following subsections we are going to offer some examples to demonstrate this

phenomenon, of course it is easy to find some other cases.

3.1 Conflicting results of theoretical studies

Researchers failed to find great congruence on the impact of international experience. Some

have argued that a firm’s level of international involvement is positively related to interna-

tional experience, i.e. the more international experience a firm possesses the more efficient it

is to adopt an entry mode with a higher level of control. This theory is based on humanity of

firm, i.e. the assumption that a firm behaves humanlike and matures as it acquires experience

in international markets (Stopford and Wells 1972). Nakos et al. (2002), Anderson and Ga-

tignon (1986), as well as Davidson (1980 and 1982) supported this idea explicitly. The

counter-argument is that international experience is negatively related to international in-

volvement, i.e. the more international experience a firm has the more efficient it is to adopt

entry mode with a lower level of control. This theory is based on the ethnocentric orientation

of many international neophytes. Ethnocentrism leads inexperienced firms to demand high

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ownership first in order to explore its advantages by holding key positions. Later on when the

firm has acquired local knowledge and when it has adapted to local conditions shared owner-

ship or a low degree of ownership is preferred. This theory was supported by Weichmann and

Pringle (1979). However, some others argued through empirical studies that international ex-

perience has no significant relation with the choice of entry mode (Brouthers 2002; Chung

and Enderwick 2001).

Cultural distance was another arguable factor. Some economists or marketing experts point

out that the cultural distance between the home and the host country discourages the owner-

ship involvement, i.e. it is negatively related to the level of control. This viewpoint was sup-

ported by Erramilli and Rao (1993), Gatignon and Anderson (1988), as well as Kogut and

Singh (1988), and may be explained

by managers shying away from ownership involvement when they have no or solely

inconsistent knowledge about local values or operation methods (Root 1994; David-

son 1980 and 1982), or

by managers undervaluing the investment due to uncertainty caused by cultural dis-

tance (Root 1994), or

by high information collecting costs due to cultural distance (Root 1994), or

by high managerial costs, e.g. due to required trainings.

But not all authors think so. Some economists argue that cultural distance encourages owner-

ship involvement. This can be explained by the fact that ownership makes it possible to do

things in its own way which is assumed to be more efficient and more advantageous (Hymer,

1960). This viewpoint was supported by empirical studies of Anand and Delios (1997) as

well as Padmanabhan and Cho (1996).

3.2 Conflicting results of empirical studies

International experience, assumed to have important implications for entry mode decision,

was examined empirically with great frequency. Surprisingly much conflicting results can be

observed thereby. Some studies support the assumption that the more international experi-

ence a firm possesses the more efficient it is to adopt an entry mode with higher level of con-

trol, i.e. a positive relation is concluded. Such findings were made by Evans (2002), Herrman

12

and Datta (2002), King and Tucci (2002), Reuber and Fisher (1997), Argarwal (1994), Er-

ramilli (1991), Anderson and Gatignon (1986), as well as Caves and Mehra (1986). In con-

trast to this Chung and Enderwick (2001) found some empirical support for a negative rela-

tion.

There are also conflicting results with regard to the influence of cultural distance on entry

mode decision. Some studies, see e.g. Leung et al. (2003), Cristina and Esteban (2002), Ev-

ans (2002), Treadgold (1998), Gatignon and Anderson (1998), Hennart and Larimo (1995),

Erramilli and Rao (1993), as well as Kogut and Singh (1988), found that there is a negative

relationship with the level of control, i.e. the higher the cultural distance the more efficient it

is to adopt an entry mode with a low level of control. Other empirical studies provided evi-

dence for a positive relationship with the level of control. This, for example, applies for An-

and and Delios (1997) as well as Padmanabhan and Cho (1996).

Firm size is another important factor which has initiated many examinations in the past and

which also leads to obviously conflicting results. Some studies, such as those by Leung et al.

(2003), Erramilli and Rao (1993), Kogut and Singh (1988), as well as Caves and Mehra

(1986), support the assumption that the bigger a firm is, the more efficient it is to adopt high

equity entry mode (i.e. positive relationship). In contrast to this Evans (2002) as well as Reu-

ber and Fisher (1997) found that the size of a firm is not an important predictor.

Finally it is worth to be mentioned that most of the existent empirical papers on market entry

mode choice are designed similarly. At first some hypotheses are developed on the basis of

preceding literature research and/or own perceptions. This is followed by data gathering and

analysis (primarily by means of regression based methods). Then, the factors being signifi-

cantly related to entry mode choice are determined and interpreted with respect to their stra-

tegic management implications.

4. Conclusions and outlook

From the above considerations we can extract some useful implications for marketing man-

agement practice. At the same time the existing conflictions between theory and empirical

“reality” make us conclude some implications for future research.

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4.1 Implications for international marketing practice

As shown in the so-called “Observatories of European SME” small and medium enterprises

in Europe are facing an intense domestic and international competition. They encounter four

major constraints to their development: lack of skilled labors (20 %), access to finance (13

%), administrative regulation (12 %), and infrastructure (6 %). SMEs in other regions of the

world are facing similar challenges to some extent. More and more firms are increasing their

international business to overcome such constraints (see the 1st and 7th Observatory of Euro-

pean SME 2002). It might be a good strategy for SMEs as well as large enterprises to realize

economies of scale in view of thus gaining competitive advantages by internationalizing their

business vertically or horizontally.

Most of the managers thinking about which market they should enter and how this should be

done might have a certain predisposition to decide in favor of a market with a culture which

is similar to the domestic one. If this is not possible they can be assumed to prefer a low eq-

uity mode for those markets with a high cultural distance. This is supported by Grant Thorn-

ton’s survey from which it is concluded, for example, that European firms are less active in

exporting to China due to the assumed or existing cultural differences (Grant Thornton’s

2003 IBOS). However, as shown above, there are many theoretical and empirical results sup-

porting the opposite as well. There are also many firms that have been very successful by op-

erating in new markets with quite different cultures, such as NOKIA, MOTOROLA, and

SIEMENS, in China for instance. So cultural distance is a factor to be considered when entry

mode decision is being made, but it is not a determinative one, and it should not be an obsta-

cle of entering into a potential market with the right mode. But also some other factors such

as firm size and international experience are not determinative unilaterally.

Due to being a multistage decision making process (Root 1994) the choice of foreign market

entry mode must be addressed in accordance to that. This means that at least near-optimum

solutions are only attainable if the relevant factors as well as their interactions and tradeoffs

are considered from a dynamic perspective.

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4.2 Implications for future research

4.2.1 Some trends in market entry mode theory

a) A general or complete entry mode decision making model

Most of the existing literature focuses on the exploration of those factors which influence the

market entry mode decision and on the investigation of their impact on this decision. These

studies mostly result in a partial behavior analysis (Dunning 1988). Being specific to some

certain context and time period the cognitions of partial behavior analysis are limited and dif-

ficult to generalize. Restricting to selected factors may easily lead to wrong or inconsistent

conclusions, just like one who touches only the leg of an elephant and claims that an elephant

looks like a tree. This might also explain the above mentioned conflicting results. So, more

general business strategy models are needed to analyze the market entry mode choice and to

explain the genesis of corresponding decisions. Such a “general” or “complete” model should

engage in at least individual, organizational, as well as institutional or societal level of analy-

sis on their respective impacts on entry mode choice decision. Why so? Since entry mode

choice is made directly by owners and/or managers, individually or cooperatively. Individu-

als’ behavior and decision making are influenced and restricted by their preferences, their

incomplete rationality (due to inadequate information, limited computational skills, as well as

uncertainty), the defined roles provided by the organization, as well as the contingent envi-

ronment around them. As argued by Evan (1993) organizational strategy, organizational

structure and environment are in close relationship; good matching between environment and

organizational strategy and structure is positively related to performance. Organizational be-

havior and individual decisions shape mirror the environment, and the environment affects

individual as well as organizational decision and behavior.

b) A dynamic or rather longitudinal entry mode decision making model

We could detect that market entry mode choice was primarily regarded as a one-stage or a

static decision making problem, primarily evaluated by the outcome of market entry mode

decisions. But in fact in many cases it is a multiple-stage problem which involves at least a

process of goal formulation, alternative strategies identification, and optimal or suboptimal

strategy selection. A dynamic choice model which is more ambitious to emphasize cognitive

processes in decision making involves a hierarchy of single decisions, each of which being

15

an attempt to improve the outcome in the light of new information gained in previous deci-

sions. Thus it provides a more realistic description of human problem solving than a static

one does. Furthermore, firms having started to enter into a foreign market may change their

original strategy due to learning effects or unscheduled developments. So, dynamic models

which additionally consider longitudinal aspects are desirable to fully understand foreign

market entry mode decisions. Some researchers, such as Pan et al. (2000), have realized this

trend and tried some attempts but it still deserves more attention in future research.

c) Comparative studies

Market entry mode decision has been studied primarily as a profit maximization problem of

industrial or non-industrial organizations (such as banks and hotels) which exist for profit

and growth. However some non-industrial organizations, such as public universities or

chambers of commerce, do not primarily exist for profit, expansion or growth. Market entry

mode decisions of such organizations are normally not driven by profit maximization. The

differences in entry mode decision making of profit and non-profit oriented organizations are

worth to be investigated in depth. Furthermore market entry mode decisions might differ

from time period to time period due to varying macro or micro contexts. Hence, intertempo-

ral studies on this problem may induce a more precise understanding of market entry mode

theory. To our knowledge there are few existing papers studying market entry mode choice

from these two aspects.

d) A multi-objective problem

Besides profit maximization there are also some other goals, such as network building or in-

formation gathering, that may drive the market entry mode decisions of industrial organiza-

tions. These goals might be of conflicting nature and might have different priorities for the

respective decision. So, if we redefine the problem by taking into account other or rather

more objectives of foreign market entry we have to solve it in a quite new way. Recently Ha-

jidimitriou et al. (2003) constructed a goal programming model to solve entry mode choice as

a multi-objective problem. Future research might focus on solving this multi-objective prob-

lem by means of alternative economic tools.

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4.2.2 Some research strategies for market entry mode theory

In this subsection we are going to discuss some research methodologies or topics which

might be applied or explored in future studies.

a) Case study methodology

Almost with no exception previous empirical studies on market entry mode choice were

based on a sample survey. Accordingly, the expressiveness of the corresponding analytical

results strongly depends on the sample quality which is difficult to control, especially if stra-

tegic phenomena are considered. Another problem of such surveys is that the analytical re-

sults from a certain sample are generally valid only for the specific context represented by

the sample. Thus the generalization of a market entry mode model being justified by a certain

sample meets some difficulties. However, if we narrow our investigation to a specific type of

firms, and if we confine to the associated environment we might get some deeper insights in

entry mode decision making and some practical implications for managers as well.

b) Computer simulation methodology

Almost as neglected as case study methodology is the use of computer simulation. Entering

into a new market normally entails a great commitment of resource which is difficult to be

recovered or transferred when the measure fails due to adopting a wrong entry mode. Com-

puter simulations on the performance consequence of market entry mode decisions in ade-

quately specified contexts might help to reduce the risk of entry mode choice. Several studies

suggest potentially fruitful applications of this methodology to decision making problems

(Nagy et al. 1989; Nersesian 1990).

c) Interdisciplinary methodology

In the past, the problem on hand has been studied from different perspectives of economics,

such as transaction cost economics (Anderson and Gatignon 1986), network economics

(Coviello and Munro 1997), organization economics (Aulakh and Kotabe 1997; Madhok

1998), institution economics (Brouthers 2002; Lu 2002; Meyer 2000), as well as information

and uncertainty (Müller 2002). However as far as we know only very few of the existent pa-

pers have studied this problem from an interdisciplinary perspective including, e.g., knowl-

edge from sociology and behavior science (Herrmann and Datta 2002 inspected the impact of

17

successor CEO characteristics on entry mode choice for instance). The existing backlog in

this respect should be accounted for in future research.

Being a decision making problem market entry mode choice shares some similarities with

other decision making problems. For example, in the “Art of War2” Sun Tzu articulated the

conditions of successfully waging a war. He analyzed in detail both decision makers and or-

ganizational or institutional environments. Referring transdisciplinarily to such a prominent

decision making problem may lead to new approaches for studying market entry mode

choice. In addition the respective decisions might be studied axiomatically by less self-

evident economic disciplines such as option theory (Li 2003).

d) Sights on emerging markets

A special but highly challenging topic within the research on market entry mode choice con-

cerns emerging markets such as China, India, or Russia. Such markets are characterized by a

huge or significantly growing market capacity, transiting economic and political systems,

changing consumption behavior, distinct culture, and a favorable investment environment,

offering a good chance of development, especially for SMEs. Some researchers have already

conducted their activities in this direction (cf. e.g. Leung et al. (2003) and Nakos and

Brouthers (2002)), but further research is still needed to reliably answer questions such as,

how did European SMEs develop successful market entry mode strategies for China which is

broadly assumed to be culturally distant.

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18

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27

Table 1: An assessment of existing models and theories on market entry mode choice

Basic models References Theory applied Main arguments Limitations SD model

Johanson and Paul (1975);

Brooke (1986);

Young et al. (1989)

Firm theory Internationalization of SMEs is a long, slow and incremental proc-ess of cultural and geographical expan-sion and commitment.

Can not explain why some newly established firms start operation in foreign markets with high equity entry mode, such as foreign direct investment.

TCA model and extensions

Anderson and Gatignon (1986); Hill et al. (1990);

Klein et al. (1990); Erramilli and Rao (1993)

Transaction cost theory, institution theory, and some others

Efficiency maximiz-ing firms adopt entry modes which mini-mize transaction costs.

Measurement proves to be dif-ficult, and there is no connection with corporate governance.

OLI model Dunning (1977, 1980, 1988, 1995, 1998, and 2000)

International production theory, organization theory, internalization theory, location theory, and some others

The choice of market entry mode is deter-mined by three sets of advantages: owner-ship, location and in-ternalization advan-tage. The more ad-vantages a firm pos-sesses the more likely it adopts a high equity entry mode.

The static model ignores the im-pact of the firm objective, the decision maker, and the situ-ational contin-gency surround-ing the decision maker when the entry mode choice decision is made.

OC model Aulakh and Kotabe (1997);

Madhok (1998)

Organization theory

Entry mode decision depends on the de-ployment and the de-velopment of firm capacity.

Firm capacity is not limited to ownership boundaries and it is not justifiable to ignore both the decision maker and the social and political en-vironment.

DMP model Root (1994);

Young et al. (1989);

Kumar and Subramaniam (1997)

Behavior theory, contingency theory, and some others

Entry mode choice is regarded as a multi-stage decision making process taking into consideration some important factors.

Ignores the im-pact of the or-ganization effi-ciency and the decision maker.